REPORT FROM THE COMMISSION TO THE COUNCIL in accordance with Articles 12 (4) and 28 (2) (g) of the Sixth Council Directive of 17 May 1977 on the harmonization of the laws of the Member States relating to turn-over taxes-Common system of value added tax: uniform basis of assessment
Date: 1994-12-13
Institutions: European Commission
Subjects: VAT, agricultural product, floriculture, fraud against the EU, horticulture, national implementing measure

COMMISSION OF THE EUROPEAN COMMUNITIES 

COM(94)  584  final 

Brussels,  13.12.1994 

94/0324  (CNS) 

REPORT  FROM  THE  COMMISSION  TO  THE  COUNCIL 

in  accordance  with  Articles  12(4) and  28(2)(g)  of  the 

Sixth  Council  Directive  of  17 May  1977 

on the harmonization  of the  laws  of the Member  States relating  to  turn-over  taxes-

Common  system  of value  added  tax:  uniform  basis  of  assessment 

Proposal  for  a 

COUNCIL  DIRECTIVE 

amending  Directive  77/388/EEC 

on  the  common  system  of  Value  Added  Tax 

(taxation  of  agricultural  outputs) 

(presented  by  the  Commission) 

REPORT FROM THE COMMISSION TO THE COUNCIL 
in accordance with Articles  12(4) and 28(2)(g) of the 
Sixth Council  Directive of  17 May  1977 
on the harmonization  of the laws of the Member  States relating to turn-over taxes-
Common  system  of value added tax: uniform  basis of assessment 

Contents 

1. 
2. 

3. 

4. 

5. 

6. 
7. 
8. 

Introduction 
4 
The historical  context of the Council decisions on the approximation  of VAT 
rates 
5 
Approximation  of VAT rates - changes in VAT rates applied in Member 
States 
7 
VAT rates and the functioning  of the internal  market - the influence  of VAT 
8 
rates on cross-border purchasing patterns 
VAT rates and the functioning  of the internal  market - the influence  of VAT 
11 
rates on intra-Community  trade by taxable persons 
13 
The reduced  VAT rate - reviewing the scope of Annex H 
17 
The transitional  VAT rate provisions 
20 
Conclusions 

1. 

Introduction 

This  document  constitutes  the  reports  that  the  Commission  is  required  to  submit  to the 
Council  in  accordance  with  Articles  12  (4)  and  28  (2)  of  the  sixth  VAT  Directive  as 
amended by Council  Directive  92/77/EEC in particular.  The objective  of the report is to 
examine the action undertaken by Member  States in  1993 and  1994 on the approximation 
of VAT rates having regard to the functioning  of the internal market.  The report seeks to 
establish whether distortions of competition  as between Member  States have arisen in this 
context,  particularly  in  the  light  of  the  opening  up  of  the  single  market  to  consumers 
wishing to make cross-frontier  purchases. 

The report begins by recalling the significance  of the Council  decisions in  1991 and  1992 
on the approximation of VAT rates (Chapter 2). These decisions represented a historic first 
step by  the Community  in this area and paved the way  for  the abolition  of  Customs and 
fiscal  controls at the Community's internal frontiers  on 1  January  1993, the implementation 
of  the  transitional  VAT  regime  and  with  that,  the  completion  of  the  Single  Market 
programme.  The action taken by Member  States in this regard is summarized  in Chapter 
3.  In this context, the role that VAT rate approximation plays in the functioning  of a single 
market  is  examined  particularly  insofar  as  its  influence  on  the  pattern  of  cross-border 
purchasing behaviour of private individuals in that market is concerned  (Chapter 4).  The 
case of intra-Community  trade by taxable persons is also briefly  considered  (Chapter 5). 

The report then goes on to deal with  a number of specific  issues on which the Council is 
required to carry out a review. The first of these concerns the scope of the reduced rate and 
the coverage of supplies of goods and services laid down in Annex H to the sixth Directive 
(Chapter 6).  Article  12 (4) of the Directive lays down that the Council  should review this 
list every two years to see whether any changes to its scope are desirable. The second issue 
concerns the operation of certain transitional VAT rate provisions which may be applied by 
Membef  States  during the transitional  period  referred  to in  Article 28 1  of  the Directive 
(Chapter 7).  Article 28 (2) (g) requires the Council to review these rates from  the point of 
view of the risk of distortions of competition that their existence may create in relation to 
the functioning  of the internal  market. 

Finally, it should be noted that there are a number of rate-related  issues which this report 
does not  deal  with  in  detail  viz.  (i)  the  harmonization  of  excise  duties  and  the  effect  of 
present disparities in such duties on distortions of competition  in the internal  market,  (ii) 
future  action  with  regard  to  further  approximation  of  VAT  rates  in  the  Community 
(including  the  level  of  the  standard  rate  after  1996  and  the  scope  of  the  reduced  rate). 
These issues are matters to be dealt with separately in the context of the introduction of the 
definitive  VAT regime.. 

The historical context of the Council decisions on the approximation 
of VAT rates 

In matters of VAT rate harmonization, the Commission has always taken the provisions of 
the Treaty of Rome as its touchstone.  In this context  Article 99 of the Treaty of Rome (as 
amended by the Single Act) states that 

adopt  provisions  for  the  harmonization  of  legislation 
"the  Council  shall 
concerning turnover taxes 
to the extent that such harmonization is necessary to 
ensure to ensure the establishment and functioning  of the internal market within the 
time limit laid down in Article 8A" 

The position as enshrined in Community law was thus clear: completing the internal market 
within the agreed time frame  (before  31 December  1992) was an absolute priority  for  all 
Member  States.  The Commission  accordingly  put forward  a series of proposals  aimed at 
meeting  the  challenge  of  completing  the  internal  market  programme  on  time  through 
amongst other things, the abolition of fiscal controls at the Community's internal  frontiers.1 

These  proposals  were  very  ambitious  in  their  aims  and  intent.  It  was  envisaged  that  all 
transactions in intra-Community trade would in future be subject to Value Added Tax levied 
in  the  country  of  origin  and  that  the  present  system  taxing  imports  and  remitting  tax  at 
In  the  context  of  these  proposals,  a  fairly rigorous 
export  would  end  for  such  trade. 
approximation  of VAT rates would be necessary  both for  a widespread  application  of an 
origin-based VAT system for trade amongst business and more particularly to allow private 
individuals the right to purchase goods for their own consumption tax-paid in any Member 
State and to return to their Member  State of residence without being subject to controls at 
the borders or having to account there for any taxes on their purchases. Up to then Member 
States had been  more or less free  to set  VAT rates at levels of their  own choosing.  This 
state  of  affairs  would,  however,  have to  change if  the internal  market  was to  become a 
reality. 

Progress in Council discussions proved slow initially.  Eventually, a series of key meetings 
of the ECOFIN Council of Ministers took place from  1989 to  1991 during which the basic 
shape of the VAT arrangements to be applied to intra-Community  trade after  1993 were 
agreed. As early as October 1989, the Council decided that there would be insufficient  time 
before  1  January  1993  for  the  conditions  seen  as  a  necessary  prerequisite  for  the 
introduction of a system of taxation in the country of origin, to be fulfilled.  It was essential 
therefore  that  a  taxation  system  should  be  devised  for  intra-Community  trade  between 
businesses based on the continued  levying of VAT and excise duties in the Member  State 
of  destination,  which  would  at the  same time  permit  border  controls to  be  abolished  on 
schedule. This eventually  led to the setting up of the VAT transitional  regime. 

This  decision  inevitably  had  important  consequences  for  the  discussions  on  the 
approximation of VAT rates. Rate approximation was still seen as an absolute precondition 
for  the  abolition  of  travellers'  allowances  and  border  controls.  Indeed  Member  States' 
concern  over the potential  distortive effects  of  disparities in VAT rates was such that the 
Council  insisted on drawing up special  regimes for  both distance selling and  sales of new 

Com  (87)  320  to  329 

means of transport; under these schemes VAT would in principle continue to be payable in 
the Member  State of final consumption  for  sales to private individuals. 

In March and June  1991, the Council reached agreement on the essential characteristics of 
the VAT rate  system  to be applied  from  1993 onwards in the context  of the transitional 
VAT  regime.  This  agreement  differed  in  some  important  aspects  from  the  original 
Commission proposal of  1987. The idea of rate bands contained in the  1987 proposal was 
dropped in favour of minimum rates. A minimum of 15% would apply to the (one) standard 
rate permitted. Increased or luxury VAT rates would be prohibited. Member States would, 
in  addition,  have the option  of  applying  one (or possibly  two) reduced  rates subject  to a 
minimum  of  5%.  The  optional  nature  of  the  reduced  rate  together  with  a  considerably 
lengthened list  of goods and  services to which it might  apply represented  a second  major 
departure from  the 1987 proposal. Moreover, it was also agreed that Member States would 
be allowed to apply or continue to apply  a series of other rates (super-reduced  rates, zero 
rates, "parking" rates etc.) on a transitional basis i.e. until the introduction of the definitive 
VAT regime scheduled  for January  1997. 

Despite this agreement, matters were not formalised  until October  1992 by the adoption of 
Directive 92/77/EEC amending the sixth VAT Directive. The delay in adopting the Directive 
was  due  mainly  to  the  difficulty  that  the  Council  had  in  resolving  certain  issues  left 
undecided  from  1991. In the end, the Council  succeeded  in  adopting the Directive while 
deciding  to  defer  decisions  on  some  of  the  more  difficult  items  until  a  later  date  e.g. 
decisions on the rates to be applied to agricultural outputs, works of art and gold. Otherwise 
the Directive faithfully  reflected  the earlier agreement. It made a clear distinction between 
those elements of the rates package which would become a long-term feature of Community 
VAT  rates  law  (Article  12) and  those  which  were  transient  in  nature  and  thus  liable  to 
disappear at the end of the transitional  period  (Article 28). 

3. 

Approximation of VAT rates - Changes in VAT rates applied in Member 
States 

With  the  adoption  of  Directive  92/77/EEC,  one  of  the  last  obstacles  to the  completion  of 
the internal  market programme  in the VAT field had been  overcome.  In fact  the Directive 
merely  formalized  a process  of  convergence  of  VAT  rates which  had  already  begun  with 
the  Council  agreement  of  1991. 

A  glance  at  Table  1 will  show  the  degree  to  which  the  process  of  convergence  evolved 
between  1987 (the year  in  which  the  original  proposals  were tabled)  and  1994.  The  most 
obvious  difference  in  the  structure  and  level  of  VAT  rates  applied  in  Member  States 
between  1987  and  the  present  is  demonstrated  by  the reduction  in  the  absolute  number  of 
rates  applied  by  Member  States  as  well  as  the  general  trend  towards  convergence  in  the 
level  of the  standard  rate.  In  addition  the  abolition  of  the increased  (or  luxury)  VAT  rate 
(six  such rates were in force  in  1987) and the reduction  in the number  of reduced  rates had 
contributed  significantly  to the  process  of  convergence. 

Against this, the possibility  left  open  to Member  States under the Directive to  maintain  or 
create  other  rates on  a transitional  basis has meant  that  convergence  still  has  some way  to 
go  to  produce  a  consistent  Community  wide  system  of  VAT  rates.  This  is  particularly 
evident  from  the  number  of  super  reduced  VAT  rates  still  in  force  in Member  States  and 
the (relatively  modest) use of "parking" rates, all of which  are scheduled to disappear at the 
end  of the  transitional  period  - these  questions  are  considered  in  greater  detail  in  Chapter 
7. 

As regards the level of the rates, it will be seen that levels of the standard rate vary  between 
15%  and  25% while  reduced  rate  levels  vary  from  5% to  12.5%.  However,  the  (simple) 
average  of the  standard  rate applied  across the Community  is now just  over  18% while the 
average  reduced  rate  is just  under  6%. 

The process of  convergence  has also had  a  small  effect  on the weighted  average VAT  rate 
calculated  for  the  Community  as a whole  -  as can  be  seen  from  the  following  estimates 

Weighted  average  rate 
(EC-12) 

all  rates 

UJ6 

standard  rate 

reduced  rate 

increased  rate 
^including  zero  rates 

1992 

1993 

13.89 

16.79 

5.85* 

26.12 

17.14 

5.70* 

The weighted  average  of the rates  applied  generally  throughout  the twelve Member  States 
increased  very  slightly  between  1992  and  1993.  This  results  from  an  increase  in  the 
average  standard  coupled  with  a decrease  in the average  reduced  rate applied  Community-
wide. 

Clearly  the  question  of  further  convergence  in  VAT  rates  will  again  be  taken  up  in  the 
context  of  the  discussions to take  place  on the introduction  of the  definitive  VAT  regime. 

4. 

VAT rates and the functioning of the internal market - the influence of 
VAT rates on cross-border purchasing patterns 

The phenomenon of cross-border  shopping by private persons is not something new which 
commenced with the lifting  of frontier  controls and the abolition  of travellers' allowances 
in January  1993. In many ways the entry into force of the new VAT regimes "legitimized" 
existing intra-Community purchasing patterns which had evolved over a considerable period 
of time (i.e. decades). It had always been the Commission's concern that the completion of 
the internal  market should create a dynamic economic opportunity  for business, trade and 
industry  to develop and expand in a market  free  of administrative  obstacles and burdens. 
At the same time the Commission was anxious to ensure that the single market was built 
on  solid  foundations  within  an  equitable  and  fair  regulatory  framework.  In  the field of 
indirect taxation for  example it was essential to guarantee in a Community without border 
controls, that distortions of competition  or deflections  of trade did not occur as a result of 
fiscal  factors  such as wide disparities in VAT rates. 

In order to assess the effect  of the abolition  of fiscal frontiers  on cross-border  purchasing 
patterns, the Commission contracted an outside consultant to study this question on the basis 
of the available evidence since January  1993.2 The study had three key  objectives 

1.  to  identify  any  discernible  changes  in  the  pattern  of  purchases  made  by  private 
individuals brought  about by the lifting  of restrictions on cross-border  purchases on 1 
January  1993; 

2.  to identify  the markets which may have experienced  shifts  in the terms of competition 
or the pattern  of trade as a result of the remaining  divergences of rates or excise duty 
between Member States 

3.  to quantify  as much as possible the main factors  giving rise to any  such distortions of 

trade and competition 

The study covered all internal  borders of the Union; its scope for  VAT purposes included 
goods listed  in  Annex H of the  sixth Directive but  excluded  distance  sales,  sales  of new 
means of transport, works of art and antiques. 

The overall  conclusions of the study revealed that 

generally  speaking,  apart  from  the  German/Danish  frontier  there  were  no  major 
changes in the patterns of cross-border  purchasing behaviour  due to differences  in 
VAT rates alone following  the abolition  of fiscal  frontiers 

the non-harmonization  of  excise  duties has always caused  significant  cross-border 
shopping decisions by individuals, although differences  in tax-exclusive prices also 
contribute to this phenomenon.  The freedom  to purchase larger quantities of duty-
paid goods in other Member States since 1  January  1993 has compounded the effect 

2 

"VAT and excise duties: changes in cross-border purchasing patterns following the abolition of fiscal 
frontiers  on 1 January  1993" (Price Waterhouse) - August  1994 

of  non-harmonization  of  the  duty  rates,  and  has  led  to  some  further  changes  in 
shopping  patterns  in  certain  cases. 

The findings of the study as it concerns individual  categories of products will be commented 
upon  in  greater  detail  elsewhere  in  this  report.  As  a  general  comment,  however,  it  is 
noteworthy  that  as  regards  VAT,  the  study  finds  that  no  dramatic  changes  in  purchasing 
patterns  have taken  place  since January  1993  although  the  situation  at the  border  between 
Germany  and  Denmark  is  described  as  "volatile".  Cross-border  shopping  is  of  particular 
importance  at  the  following  borders  viz.  Germany/France  (for  domestic  durable  goods), 
Germany/Denmark  (for  domestic  durable  goods)  and  Luxembourg/Belgium  (for  jewellery 
and  watches);  however,  no  significant  increases  have  taken  place  over  the  last  eighteen 
months.  In  addition,  as  regards  goods  subject  to  reduced  rates  of  VAT,  cross-border 
shopping is only  taking place on a limited  scale with the exception  of foodstuffs;  the latter 
has,  however,  always  been  a  feature  of  intra-Community  shopping  and  again  nothing  of 
significance  has been  noted  since  January  1993. It  is  also  worth  noting  that  it  has  proved 
impossible to come up with recent reliable estimates of the magnitude of these cross-border 
shopping  flows  broken  down  by  product. 

These  findings  can,  in  turn,  lead  one  to  conclude  that  a  sufficient  degree  of  VAT  rate 
approximation  had taken  place by January  1993.  Before  reaching  any  definite  conclusions 
on  this  matter  it  would,  however,  be  prudent  to  bear  a  number  of  other  relates  issued  in 
mind: 

firstly,  it  should  be  remembered  that  considerable  restrictions  on  the  freedom  of 
business  to  carry  out  certain  types  of  cross-border  selling  have  also  been  in  force 
since  January  1993  as  a  result  of the  special  regimes  applicable  to  distance  selling 
and  sales  of  new  means  of  transport.  These  regimes  place  considerable  obligations 
on  sellers  such  as the  obligation  for  distance  sellers to remit  the tax  receipts  to  the 
Member  State  of  final  consumption  once  sales  have  exceeded  an  annual  threshold 
which  in  certain  cases  is  as  low  as  35.000  ECU.  In  these  circumstances  distance 
sellers may  not feel  encouraged  to  seek  extra  sales in  other Member  States because 
of  the  associated  fiscal  obligations; 

secondly,  the  role  played  by  differences  in  rates  of  indirect  taxation  compared  to 
other factors in influencing  a consumers decision to indulge in cross-border shopping 
needs  to  be  examined. 
In  this  connection  the  study  demonstrates  that  tax  rate 
differentials  will  obviously  have  some  influence  on  the  price  of  a product  but  that 
this  effect  can  be reduced  or  magnified  through  the influence  of  other  factors.  Tax 
differentials  are  an  important  factor,  the  contribution  of  which  is  particularly 
important  in  the  case  of  excise  products  or  where  significant  differentials  in  VAT 
rates may  exist,  Germany/Denmark  being  the  most  obvious  case in  question. 

The  study  also identifies,  however,  many  other non-tax  factors  which  also influence  cross-
border  shopping  patterns.  These  factors  include  inter alia  several  distinct  but  interrelated 
categories  such  as 

other price-related factors - these include factors such as exchange rate fluctuations,  changes 
in the price of petrol  or other travel-related  costs, reductions in cost brought  about by  more 
efficient  wholesale  or  retail  distribution  networks; 

non-price-related  factors - very often  a consumers decision may be influenced  by incentives 
such as more flexible opening hours, product range and quality, guarantee terms,  after-sales 
service etc.; 

obstacles  - language,  distance  and  geographical  barriers  are the  elements which  constitute 
the  single  most  significant  factor  in  preventing  the  great  majority  of  Community  citizens 
from  partaking  in  cross-border  shopping  activity 

These findings  have been reinforced  by the findings of a recent Eurobarometer  poll  carried 
out  across  the  Community  in  April  and  May  of  19943  on  the  Commission's  behalf.  In 
response to the question  as to whether  they  had  personally  benefited  from  the  abolition  of 
travellers'  allowances  and  customs  controls  since  1 January  1993,  less than  20%  of  those 
who  were  aware  that  cross-border  shopping  could  be  carried  out  freely,  responded 
positively.  This reply  indicates that  cross-border  shopping  is by its very  nature  something 
which  only  a  relatively  limited  number  of  people  will  ever  be  in  a  position  to  take 
advantage  of. 

None of these conclusions are particularly  surprising; indeed  most  are a matter of  common 
sense.  What  needs to be  noted  is the fact  that  cross-border  shopping  is  something  that  has 
always taken place since long before the single market was created.  The abolition of border 
controls  and  travellers'  allowances  in  January  1993  facilitated  this  process  by  allowing 
private  citizens  unrestricted  access  to  the  market.  It  did  not,  however,  give  rise  to  any 
unexpected VAT-induced  distortions of competition  or deflections  of trade because,  firstly, 
the  necessary  approximation  of  VAT  rates had taken  place for  those product  sectors  liable 
to  be  subject  to  cross-border  shopping  and  secondly,  because  of  the  introduction  of  the 
special  regimes  for  distance  selling. 
In  consequence  if  there  is  insufficient  evidence  to 
justify  major  changes  to  the  VAT  rates  system,  the  time  has  now  come  to  give  some 
thought to relaxing the rather restrictive  conditions  contained  in the  special  regimes and  in 
particular to the question of increasing the rather limited thresholds currently  applied to such 
trade. 

Eurobarometer 41.0 of the European Commission by INRA (Europe), 5 July  1994 

10 

5. 

VAT  rates  and the functioning of  the  internal  market  - the  influence  of 
VAT rates  on intra-Community trade  by taxable  persons 

In examining the effects  of the abolition of fiscal frontiers  on the functioning  of the internal 
market,  the  Commission  has  tried  to  assess  whether  differences  in  VAT  rates  as  between 
Member  States  has  influenced  behaviour  of  businesses  (i.e.  taxable  persons)  involved  in 
intra-Community  trade.  Difficulties  arise  in  making  any  assessment  due  to  the  lack  of 
precise information  on the pattern  of behaviour  of taxable  persons making  purchases  from 
or  sales to  taxable  persons  in  other  Member  States.  Trade  of  this  kind  was  not  included 
within  the  scope  of  the  study  referred  to  in  Chapter  4  on  the  grounds  that  under  a 
destination-based  taxation system, the rate of VAT applicable in the Member  State of origin 
should  not  in  principle  influence  the purchasing  decision  of  an  enterprise. 

Under  the  VAT  transitional  regime,  VAT  continues  to  be  levied  in  the  Member  State  of 
destination  of  the  goods  in  trade  between  taxable  persons. 
It  is  difficult  to  establish, 
therefore,  why  differences  in  rates  should  play  any  significant  role  in the  decision-making 
process  of  businesses  involved  in  such  trade, 

However,  there  are  a  limited  number  of  cases  where  certain  types  of  taxable  persons  are 
permitted  to purchase  goods in  another Member  State  and pay  the  rate  of  VAT  applicable 
in  the Member  State  of  origin.  These  cases  concern  supplies  made  by  taxable  persons  in 
one Member  State to  one  of  the  following  purchasers  in  another  Member  State 

small  businesses  operating  under  exemption  thresholds 
flat  rate  farmers 
taxable  persons carrying  out transactions  which  are  exempt  under  Article  13 of  the 
Sixth  VAT  Directive 
non-taxable 
10,000  ECU. 

legal  persons  purchasing  goods  under  an  annual 

threshold  of 

In  all these cases, the purchasing  decision  made by  one of these entities may be  influenced 
by  the  rate  of  VAT  applicable  in  the  Member  State  where  the  purchase  is  made.  These 
cases  were  the  subject  of  a  further  study  carried  out  on  the  Commission's  behalf  in  a 
separate  "own  resources"  related  context4.  This  study  found  that  there  are  no  figures 
available  relating  to  the volume  of  trade  covered  by  these  cases  and  that  estimates  of  the 
amount of trade involved are difficult  to make.  The information  available to the consultants 
suggested  that  the  trade  was  unlikely  to  be  significant  particularly  in  the  context  of  the 
overall  volume  of  intra-Community  trade.  The  study  found  that  in almost  all  cases  where 
firms might be tempted to purchase goods in other Member  States as a result of lower VAT 
rates,  the  net  effect  of  this  trade  on  the  calculation  of  own  resources  was  still  considered 
to be negligible.  No evidence of  significant  changes in cross-frontier  purchasing  behaviour 
of  taxable  persons  was  found  at  any  borders  between  Member  States  with  important 
differences  in  VAT  rates. 

4  The extent of transboundaiy transactions taxed according to the origin principle (Deutsches Institut 

fur  Wirtschaftsforschung  - September  1994) 

11 

The  study  did  come  across  particular  cases  of  German  farmers  subject  to flat  rate VAT 
schemes who consistently  purchase chemical fertilisers  and pesticides, which  in Germany 
are  subject  to  the  standard  rate,  directly  from  Luxembourg,  France,  the  Netherlands  or 
Belgium where such products are taxed at reduced rates.  In this case, however, the farmers 
in  question  are  acting  in  the  manner  of  a  private  person  by  purchasing  at  the  most 
advantageous price that the market has to offer.  The Commission does not believe that such 
cases can be considered to be creating distortions of competition.  In any event, the solution 
to any problem in this specific  area, if indeed there are problems, lies in the hands of the 
German  authorities themselves because they  can always avail themselves  of the option to 
tax  fertilisers  and  pesticides  at  the  reduced  rate  in  Germany  on  the  grounds  that  these 
products come within the scope of Category  10 of Annex H.  If the German authorities were 
to take this  option  however,  they  could  also in  consequence reduce the level  of  flat  rate 
compensation  currently  available to German farmers under the German flat rate scheme. 

The  Commission  must  conclude,  therefore,  that  in  the  absence  of  any  hard  evidence  of 
significant  distortive  effects  on  the  competitive  situation  of  taxable  persons  involved  in 
intra-Community trade caused by differences  in VAT rates, there is no reason to assume at 
present that the internal market is functioning  in anything other than a satisfactory  manner. 

12 

6. 

The reduced VAT rate - reviewing the scope of Annex H 

The  third  paragraph  of  Article  12 (3)  (a)  of  the  sixth  VAT  Directive  states  that 

"Member  States  may  also  apply  either  one  or  two  reduced  rates.  These  rates  shall 
be  fixed  as a percentage  of the taxable  amount  which  may  not be  less than  5% and 
shall  apply  only  to  supplies  of  the  categories  of  goods  and  services  specified  in 
Annex  H." 

The  second  paragraph  of  Article  12 (4)  states  that 

"On the basis  of  a report  from  the  Commission,  the  Council  shall,  starting  in  1994, 
review  the  scope  of  the  reduced  rates  every  two  years.  The  Council,  acting 
unanimously  on  a  proposal  from  the  Commission,  may  decide  to  alter  the  list  of 
goods  and  services  in  Annex  H." 

This chapter examines the manner  in which  Article  12 (3) (a) has been  applied  by Member 
States  in  practice  in  order  to  determine  whether  any  changes  to  the  scope  of  the  reduced 
VAT  rates  should  be  made  under  the  two-year  review  procedure  provided  for  in 
Article  12 (4).  The  chapter  concentrates  on whether  any  change  to  the  present  provisions 
are required  to overcome problems of distortions of competition.  Since the entry  into  force 
of the new provisions, the Commission has received numerous representations from  various 
trade  and  industry  federations  pleading  for  the  inclusion  of their  sector  in the  scope  of  the 
reduced  rate  at the  occasion  of  the next  review.  The  Commission  view that  it  is too  soon 
to consider changes in their scope for  other reasons, not least because broader issues of rate 
coverage  are likely  to be more manageable  against the background  of  Council  conclusions 
on  the  shape  of  the  1997  definitive  VAT  system.  The  general  question  of  what  future 
action  is necessary  on the  approximation  of VAT  rates in this connection,  will be taken  up 
in  the  context  of  the  Commission's  approach  to the  introduction  of  the  definitive  regime. 

Goods  and  services  subject  to  the  reduced  rate 

It will  be recalled  that  in  its meeting  of  18 December  1989, the ECOFIN  Council  decided 
that  the  reduced  rates  would  be  reserved  in  particular  for  essential  goods  and  services 
meeting a social or cultural policy objective. The categories subsequently included in Annex 
H  of  the  amended  sixth  Directive  by  and  large  reflected  these  criteria.  In  addition,  the 
process  of  selection  of  the  categories  concerned  by  the  Council  generally  followed  the 
approach  advocated  by  the  Commission  which  was  that  the  list  should  contain  only  those 
categories  of  goods  and  services  which  were  taxed  by  a  majority  of  Member  States  at 
reduced  VAT  rates. 

A  glance  at  Table  2  will  show  that  this  pattern  was  and  continues  to  be  the  case.  The 
information  available  to  the  Commission  indicates  that  in  all  but  one  of  the  seventeen 
categories  set  out  in  Annex  H,  the  majority  of Member  States  have  availed  themselves  of 
the option provided by the Directive to tax the supply concerned at the lower rate. In certain 
categories,  the  practice  has  been  for  the  overwhelming  majority  of  Member  States  to  use 
reduced  rates (or zero rates)  or exemptions (where the  service is of a kind  deemed  to be in 
the  public  interest  and  as  such  covered  by  Article  13  of  the  6th  VAT  Directive,  e.g. 
admissions  to  public  theatres,  museums  etc.).  This  practice  is  especially  prevalent  in  the 
case of supplies of foodstuffs,  water, pharmaceutical products, medical equipment, passenger 

13 

transport,  admissions  to  cultural  events  and  agricultural  inputs.  In  the  case  of  the  other 
categories, the number of Member  States opting to tax at reduced rates is somewhat  smaller 
but  with  the  exception  of  Category  15  (undertaker's  services  etc.)  all  categories  have 
justified  their inclusion  on numerical  grounds  at least, by the fact  that they  reflect  majority 
practice  within  the  Community  in  regard  to  reduced  rate  taxation. 

It  should  not  be  forgotten  of  course,  that  Member  States  have  extended  the  practice  of 
selecting Categories from  Annex H for  inclusion in their reduced rate to choosing  particular 
goods  and  services  from  within  individual  categories  for  this  treatment.  This  means  that 
while  superficially  there may  seem to be a good  deal  of  similarity  between  the practices of 
Member  States in terms of Category  selection,  coverage  of  any  individual  category  may  in 
fact  differ  from  Member  State to Member  State  depending  on how Member  States  choose 
to define goods or services from  within any given category in their own national  legislation. 

This outcome is not, however,  particularly  surprising.  Once the Council  abandoned the idea 
of making use of the reduced  rate obligatory,  the need to ensure that Member  States would 
agree  to  apply  each  category  in  a  uniform  manner  no  longer  made  sense.  Making  the 
reduced  rate  optional  did,  however,  facilitate  the  reaching  of  an  agreement  in  the  Council 
on  category  definitions.  Instead  of endless  discussions  about what  should  or  should  not be 
included  in  a  category,  it  only  became  necessary  for  the  Council  to  agree  on  the  broad 
outline  of  a  general  définition  for  each  category  at  Community  level  (i.e.  essentially  to 
decide  what  fell  outside  the  scope  of  a  category).  Subject  to  respecting  this  general 
definition  (by not  enlarging  the  scope of  a category)  each Member  State was  subsequently 
free  to use, in its implementing  legislation,  its own  definition  for  categories  depending on 
what  particular  group  of  products  or  services  it  wished  to  tax  at  the  reduced  rate.  For 
categories referring to goods Member  States have also the possibility  of using the combined 
nomenclature  to  establish  its  precise  coverage.  However,  not  all  Member  States  have 
adopted this practice or,  at least,  if they  have, the information  has not been  included  in the 
implementing  legislation  forwarded  to  the  Commission  for  examination. 

Turning  to  the  question  of  distortions  of  competition,  in  preparing  this  report  the 
Commission  was  at pains to  establish  whether  the introduction  of  an optional  reduced  rate 
had  resulted  in  an  increased  potential  for  distortions  of  competition  in  the  single  market. 
In  many  ways,  it  can  be  argued  that  in  drawing  up  the  list  of  categories  of  goods  and 
services eligible for  optional  reduced  rating, the Council  had in effect  decided that none of 
the  categories  concerned  were  of  a  type  liable  to  give  rise  to  large-scale  distortions  of 
competition  as  a result  of  significant  differences  in  VAT  rates.  The  categories  of  services 
in  Annex  H  by  their  very  nature  are  not  the  kinds  of  economic  activities  which  lend 
themselves  to  significant  cross-border  applications.  As  far  as  goods  are  concerned,  it  can 
also be  argued  that  again,  none of  categories involved  refer  to the types  of products  which 
private  persons  would  in  the  normal  course  of  events,  travel  significant  distances  to 
purchase. 

These assumptions have in fact  been borne out by the study  referred  to in  Chapter 4 which 
was undertaken  on the Commission's behalf with the object of examining this very  question. 
The study looked in particular at those categories of goods contained  in Annex H where the 
VAT  rate  applicable  differed  widely  as  between  certain  Member  States  viz.  foodstuffs, 
pharmaceutical  products,  medical  equipment,  children's'  car  seats,  books  newspapers  and 
periodicals.  In  most  cases  the  study  found  that  no  discernible  increases  in  cross-border 
purchasing patterns had taken place  since January  1993. In certain  cases, factors  other than 

14 

differences  in  VAT  rates  play  a more  determining  role in  influencing  a consumer's  choice 
e.g.  cultural  or language  considerations  on the  case of  books,  newspapers  and  periodicals, 
or  prescription  regimes  and  reimbursement  schemes  in  the  case  of  pharmaceuticals  and 
medicines. 

The only  category  where  significant  cross-border  shopping  activity  is taking place is in the 
category  of  foodstuffs.  Such  shopping  has,  however,  always  been  a  feature  of  intra-
Community trade in this sector. Moreover, the evidence shows that purchasers of  foodstuffs 
tend  in  many  cases to go against the pattern  which  VAT rate differences  might  lead  one to 
expect, e.g. Germans tend to buy certain foodstuffs  in Denmark despite the higher VAT rate 
applicable;  in  contrast,  no  significant  purchases  of  foodstuffs  in  the  UK  by  cross-border 
shoppers from  France or Belgium has been reported even though most foodstuffs  in the UK 
are  zero-rated. 

Goods  and  services  subject  to the  standard  rate 

In  addition  to  looking  at  the  reduced  rate,  the  study  referred  to  above  also  examined  the 
situation  with  regard  to  possible  distortions  of  competition  or  changes  in  cross-border 
purchasing patterns in relation to goods subject to the  standard rate. The following  types of 
goods  were  surveyed  viz.  domestic  electrical  durable  goods  (domestic  electric  appliances, 
video/audio/photographic  material, computer hardware and software  and sporting goods and 
toys),  furniture,  glassware,  etc.  and jewellery,  watches  and  the like. 

The  study  once  again  shows  that  cross-border  shopping  habits  did  not  change  in  any 
significant  way.  The  expected  explosion  in  cross-border  shopping  in  expensive  consumer 
durables between  Germany  and  Denmark  following  the  abolition  of  travellers'  allowances 
has not materialized  despite the margin  of difference  in the respective VAT  rates.  In  other 
cases,  the  abolition  of  travellers'  allowances  meant  that  cross-border  shopping  actually 
increased  in  Member  States  with  VAT  rates  higher  than  their  neighbours  because  of  the 
availability  of greater choice in the higher taxing Member State (Belgium/Luxembourg).  On 
the  Spanish/French  border  there  were  no  great  changes  in  the  magnitude  of  cross-border 
shopping  although  the depreciation  of the value  of the  peseta may  have had  an  impact.  No 
major  change  was  noticed  in  purchasing  patterns  across the  other  sensitive  borders.  In  all 
cases cross-border  shopping has been an established feature  of these border areas since long 
before  the  abolition  of  travellers'  allowances  and  frontier  controls  in  January  1993. 

The  particular  case  of  agricultural  outputs 

The  Council  is  required  to  take  a  decision  before  31  December  1994  on  the  taxation  of 
agricultural  outputs  other than foodstuffs  after  1 January  1995.  This was one of the  issues 
left  unresolved from  the discussions of the fiscal package of  1992.  At that time the Council 
decided that a standstill  arrangement would  apply under which those Member  States which 
were already  applying a reduced  rate to supplies of agricultural  outputs would be permitted 
those  Member  States  which  applied  a  standard  rate  would 
to  continue  to  apply  them; 
continue  to  apply  this rate. 

The Commission  will table a separate proposal  on this issue which will be accompanied  by 
an  explanatory  memorandum  outlining  the  reasons  why  it  has  formulated  the  proposal  in 
the  manner  it has. 

15 

In view  of the foregoing,  the  Commission  is  satisfied  that  the provisions  of  Article  12 (3) 
of the amended  sixth Directive  are working well  in practice thanks mainly  to the degree of 
rate  convergence  which  had  taken  place  as  between  Member  States  since  the  Council 
agreement  of  1991.  There is no evidence of any  significant  changes in the pattern  of cross-
border  purchasing  by  private  individuals following  the  abolition  of  border  controls.  In  the 
absence therefore  of any significant  distortions of competition  or deflections  of trade caused 
by  differences  in VAT  rates, the Commission  sees no reason  or justification  to  change  the 
contents  of  Annex  H  of  the  sixth  Directive  at  the  present  time  on  these  grounds  either 
through  the  addition  of  new  categories  of  goods  or  services  or  the  deletion  of  any  of  the 
existing  categories.  The  Commission  will,  however,  address  the  question  of  further 
approximation  of  VAT  rates  in  the  longer  term  in  the  context  of  the  discussions  on  the 
changeover  to the  definitive  VAT  regime. 

16 

The transitional VAT rate provisions 

Article  28  (2)  (g)  of  the  sixth  Directive  reads  as  follows: 

"On  the  basis  of  a  report  from  the  Commission,  the  Council  shall,  before  31 
December  1994,  re-examine  the  provisions  of  subparagraphs  (a)  to  (f)  above  in 
relation to the proper functioning  of the internal  market in particular.  In the event of 
significant  distortions  of  competition  arising,  the  Council,  acting unanimously  on a 
proposal  from  the  Commission,  shall  adopt  appropriate  measures." 

Article  28  (2)  subparagraphs  (a)  to  (f)  set  out  various  VAT  rate  measures  which  Member 
States  are  permitted  to  maintain  in  force  during  the  transitional  period  referred  to 
Article  28  1  i.e.  in  principle  up  to  31  December  1996.  This  chapter  examines  the  use  that 
Member  States  have  made  of  the  provisions  of  these  subparagraphs  and  the  effects  their 
continued  application  may  have  on the  functioning  of the  internal  market. 

The  purpose  of  Article  28  (2)  was  to  bring  together  all  those  measures  which  do  not  in 
principle  form  a  permanent  feature  of  the  long-term  VAT  rates  landscape  of  the 
Community.  In  most  cases,  it  would  have  been  impossible  for  the  Council  to  reach 
agreement  on  the  fiscal  package  in  October  1992  had  not  some  form  of  temporary 
derogation  been  conceded  to  Member  States  permitting  them  to  maintain  in  force  for  a 
limited  period  after  1992  certain  rates  not  covered  by  Article  12  (3).  Article  28  (2),  in 
consequence,  covers  a  variety  of  temporary  rate  provisions  including  measures  of 
considerable  social  and  political  importance  to  the  Member  States  concerned,  measures 
which  enable  Member  States  to  defer  full  implementation  of  Article  12  (3)  for  the  time 
being  and  measures  covering  certain  goods  and  services for  which Member  States  secured 
special  treatment  on  a temporary  basis. 

Article  28  (2)  (a)  deals with  exemption  with  refund  of  the tax  paid  at the  preceding  stage 
and reduced  rates lower than the minimum  rate laid down in Article  12 (3) in respect of the 
reduced  rates. In more  common  parlance, these  are known  as zero rates and  super-reduced 
rates respectively.  The Article allows Member  States to maintain  after  1992 those zero rates 
and  super-reduced  rates  which  were  in  force  on  1  January  1991  in  accordance  with 
Community  law.  A list  of  Member  States  covered  by  this  provision  is  set  out  in  Table 3. 
It will  be noticed that  as regards zero rates,  only the United Kingdom  and Ireland  maintain 
zero  rates  on  a large  scale  following  the  decision  by  the  Portuguese  authorities  to  abolish 
zero  rating  in Portugal  in  1992. 

The study on changes in cross-border  purchasing patterns referred  to earlier has also looked 
at the situation with regard to certain products covered by zero and super-reduced  rates (e.g. 
foodstuffs,  children's  ciothing).  However,  in  no  case was  any  significant  change  in cross-
border purchasing patterns established.  In fact  in many  cases cross-border  shopping for  the 
products concerned  is negligible.  The Commission  is of the opinion therefore  that it would 
not be justified  at this  stage for  it  to table  a formal  proposal  abolishing  or  amending  these 
rates.  However,  this is not  to say  that  a similar  conclusion  should  be drawn  in the  context 
of the definitive  VAT  regime.  It  is likely  that  a rate  system  with  fewer  (or no)  exceptions 
to  the  general  rule  will  then  be  appropriate,  and  the  Commission  would  suggest  that 
Member  States themselves  should  examine the position to  see whether  any  of these  special 
rates might be abolished  in advance of the deadline for changeover to the definitive  regime. 

17 

Article  28  (2)  (b) enables Member  States wishing to  abolish  zero rates in respect  of  goods 
or  services  other than  those  specified  in Annex  H  to apply  a reduced  rate to  such  supplies 
on  a temporary  basis. 

The United Kingdom  has recently  made use of this provision by its decision to abolish  zero 
rating on domestic fuel  and power and to replace it with an 8% rate initially  and by the  full 
rate  in  due  course. 
In  view  of  the  comments  under  the  preceding  paragraphs  on  the 
eventual  need to abolish zero and super-reduced rates the Commission is of the opinion that 
the  provisions  of  Article  28  (2)  (b)  are useful  and  should  remain  in  force. 

Article 28 (2) (c) applies to the two Member  States i.e.,  Spain  and Luxembourg, which had 
to increase their  standard  rate by more than 2% to respect the provisions  of  Article  12 (3). 
The  Article  enables these Member  States to  apply  super-reduced  rates to  all  the  categories 
of  goods  and  services  specified  in  Annex  H  and,  in  addition,  to  restaurant  services, 
children's'  clothing  and  footwear  and  housing. 

Both  Spain and Luxembourg have made extensive use of this provision (see Table 3) which 
was introduced  to compensate  for  the  potential  increase  in inflationary  pressure  as a result 
of  increasing  their  standard  rate by  two  points.  The  implementation  of  this provision  has 
not,  however,  given  rise  to  any  major  distortions  of  competition  in  the  case  of  Spain 
although  some complaints have been received in regard to the situation  as between Belgium 
and Luxembourg where  significant  differences  in VAT rates exist for the  same category  of 
supply.  As  these  measures  are  meant  to  be  temporary  in  nature,  the  Commission  would 
suggest  in  line  with  its  earlier  comments  that  both  Member  States  should  themselves 
consider  for  how  long these  provisions  need  to  continue  to  apply. 

Article  28  (2)  (d)  enables those Member  States which  applied  a reduced  rate to  restaurant 
services,  children's'  footwear  and  clothing  and  housing  on  1 January  1991  to  continue  to 
apply  these  rates  on  a transitional  basis. 

The long term  situation with regard to the appropriate rate to be applied to these goods and 
services  should  be  discussed  in  the  context  of  the  review  of  Annex  H  referred  to  in 
Article  12 (4).  Pending the outcome  of this review the  Commission  has no  suggestions  to 
make  at present  on the  desirability  of maintaining  these  reduced  rates.  It would  point  out, 
however,  that  the  present  situation  cannot  continue  indefinitely  because  it  will  otherwise 
create  a  structural  inequality  in  VAT  rates  legislation. 

Article  28  (2)  (o) enables Member  States to  apply  a  "parking"  rate  of  a minimum  of  12% 
to  supplies  of  goods  and  services  not  listed  in  Annex  H  but  to  which  the  Member  State 
concerned  had  applied  a reduced  rate  on  1 January  1991. 

A number of Member  States have made use of this provision  (see Table 3 for  details).  The 
Article  is useful  in that it facilitates  the transition  to  a more  coherent  long-term  VAT rates 
structure throughout the Community.  The Commission  feels therefore that these provisions 
should  continue  in  force  for  the time  being. 

Article  28  (2)  (f)  enables  Greece  to  continue  to  apply  specially  reduced  rates  to  certain 
Greek  Islands  and  Departments. 

18 

To the best  of the  Commission's  knowledge the  implementation  of these  specially  reduced 
rates has not  given  rise  to  any  distortions  of  competition  in intra-Community  trade.  Their 
implementation  was in fact  a special  measure  designed  to compensate for  competition  that 
these  Islands  and  Departments  may  have  faced  from  non-Community  countries.  The 
Commission  is of the opinion that these measures may continue in force for  the time being. 

skskskskïkstcjksk 

In  conclusion,  the  Commission  considers  that  the  implementation  of  the transitional  VAT 
measures  has  not  given  rise  to  any  significant  distortions  of  competition  or  deflections  of 
trade.  The Commission  is of  the opinion that these measures may  continue in force  for  the 
duration  of the transitional  regime. 

The Commission  would  recall  that  in  its initial  proposals  of  1987 on the  approximation  of 
VAT  rates  it  had  proposed  that  each  Member  State  should  be  limited  to  two  VAT  rates 
within  the framework  of the  internal  market  - a  standard  rate  and  a reduced  rate  - without 
any  zero rates  or  super-reduced  rates.  The  continued  application  of  all  of the  derogations 
permitted  to  Member  States,  particularly  those  referring  to  super-reduced  rates  and  zero 
rates, has resulted  in a plethora of different  VAT rates being applied across the  Community 
with  the  risk  of  possible  distortions  in  certain  sectors.  This  situation  is  at  odds  with  the 
need  for  simplification  of  procedures  and  the reduction  of tax  compliance  costs which  are 
indispensable  for  the  strengthening  of  the  internal  market. 

The  Commission  would  note, therefore,  that the introduction  of the definitive  VAT  regime 
would  be facilitated  were Member  States themselves to consider  changing these  provisions 
initially  by  reducing the number  of rates they  apply  generally  and where possible  replacing 
the  rates  by  one  of  the  rate  options  open  to  Member  States  under  Article  12  (3).  This 
question  will  be  taken  up  in  the  Commission  communication  on  the  introduction  of  the 
definitive  VAT  regime 

19 

8. 

Conclusions 

This  report  sets out  to fulfil  the  reporting  obligations  placed  on the  Commission  by the 
Council when adopting legislation on VAT rate approximation in  1992.  In fulfilling  these 
obligations,  the  Commission  wishes  at  the  same  time  to  provide  the  Council  with  an 
adequate assessment  of the functioning  of the VAT rates regime in the framework  of the 
transitional  VAT  regime  during  the  first  two  years  of  a  Community  without  internal 
frontiers.  The Commission thus hopes that the report will enable the Council to take a view 
as to whether the VAT rate arrangements are operating as originally intended in the absence 
of border controls or whether  any amendments are necessary. 

Based  on  such  information  as is  available,  the  Commission  believes  that  the  position  is 
generally  satisfactory  with  regard  to  the  functioning  of  the  new  system  of  VAT  rate 
approximation.  No significant changes in cross-border purchasing patterns have been found. 
Similarly  there have been  no significant  distortions  of  competition  or  deflection  of trade 
brought  about  as a result  of  excessive  disparities  in  VAT rates  as between  neighbouring 
Member  States.  The  Commission  concludes  that  in  these  circumstances  there  is  no 
justification  at present for  introducing major  changes to the essential  level  or structure of 
the  new  rates  system  or to  the  scope  of the  reduced  rate.  In  addition,  the  Commission 
concludes that  the provisional  VAT  rate  provisions  currently  in  force  do not  need  to be 
amended for the time being given that these measures are due to be phased out by the end 
of the transitional  period.  If Member  States were themselves to take action to reduce the 
number of rates generally applied this would facilitate discussions on the introduction of the 
definitive  VAT regime.  The debate on this and other VAT-related issues will be taken up 
in  the  context  of  the  Commission  communication  on  the  introduction  of  the  definitive 
regime. 

20 

EVOLUTION  OF VAT  RATES APPLIED  IN MEMBER  STATES BETWEEN  1987  AND 1994 

REDUCED  RATES 

STANDARD/INTERMEDIATE  RATES 

INCREASED  RATES 

1987 

1992 

1993 

1994 

1987 

1992 

1993 

1994 

1987 

1992 

1993 

1994 

TABLE  NO. 1 

M E M B ER 

STATES 

GERMANY 

BELGIUM 

DENMARK 

SPAIN 

7 

1/6 

-

6 

7 

1/6 

-

6 

7 

1/6 

-

3/6 

4/8 

7 

1/6 

-

3/6 

4/8 

14 

14 

15 

15 

-

19/17 

19,5 

19,5 

20,5/12 

25/25+8 

22 

12 

18 

25 

13 

18 

25 

15 

18 

25 

15 

18 

-

33 

36 

-

-

-

28 

36/-

G R E E CE 

3/6 

4/8 

FRANCE 

2,1/4/5,5/ 

2,1/5,5 

2,1/5,5 

2,1/5,5 

18,6/28 

18,6 

18,6 

18,6 

33  1/3 

22 

7/13 

IRELAND 

1,7/10 

2,3/10 

2,5 

2,5 

25 

21/10/ 

21/12,5 

21/12,5 

2/9 

3/6 

6 

8 

4/9 

3/6 

6 

8/5 

4/9 

3/6 

6 

5 

4/9 

3/6 

6 

5 

ITALY 

LUXEMBOURG 

NETHERLANDS 

PORTUGAL 

UNITED 

K I N G D OM 

19 

12 

12,5 

19/12 

19/12 

19/13 

38 

38 

15 

15 

15/12 

20 

18,5/17,5 

17,5 

17,5 

-

-

-

-

16 

15 

17/16 

16 

16 

30 

30 

30* 

30* 

17,5 

17,5 

17,5 

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Note: Portugal: Application of the 30% rate is contrary to Community law since  1.  January  1993. Portugal has announced that this rate will be abolished in its budget law for 1995. 

21 

APPLICATION  OF REDUCED VAT RATES BY MEMBER STATES TO THE CATEGORIES OF GOODS AND SERVICES 
CONTAINED IN ANNEX H OF THE SIXTH VAT DIRECTIVE (AS AMENDED) 

CAT. 

BE 

DK 

DE 

GR 

SP 

FR 

IR 

IT 

LUX 

NL 

PO 

UK 

TABLE N° 2 

1 
Foodstuffs 

2 
Water  supplies 
3 
Pharmaceutical 
products 
4 
Medical 
equipment 
5 
Transport of 
passengers 
6 
Books, 
newspapers and 
periodicals 
7 
Admissions to 
shows, etc. 
Broadcasting 
services 
8 
Services of 
writers, 
composers, etc. 
9 
Social  housing 

RR 

SR 

RR 

RR 

RR 

RR 
SR 

RR 

SR 

SR 

RR 

SR 

SR 

RR 

RR 

EXEMPT 

RR 
ZR 

SR 

RR 
SR 

RR 

RR 

RR 
SR 

RR 

RR 

SR 
SRR 

RR 

SRR 
SR 

RR 

RR 
SR 

RR 

RR 

RR 
SR 

RR 

ZR 
RR 
SR 
EX.. 

ZR 

ZR 

RR 

EXEMPT 

SRR 
RR 
PR 
RR 

RR 
SR 

RR 

RR 
PR 

SRR 

RR 

EXEMPT 

RR 

SRR 
SR 

SRR 

RR 
SR 

RR 

RR 
SR 

RR 

RR 
SR 

RR 

ZR 

ZR 
SR 
ZR 
SR 

ZR 

EXEMPT 
SRR 

EXEMPT 
RR 

RR 

ZR 

SRR 

SRR 

RR 

RR 

ZR 

RR 

SRR 

SRR 
RR 

ZR 
RR 
SR 

EXEMPT 
RR 
PR 
SR 

EXEMPT 
SR 

EXEMPT 
RR 
SR 

PR 

SR 

RR 

EXEMPT 

RR 
SR 

RR 

RR 

RR 

SR 

EXEMPT 
RR 
SR 

SRR 
RR 
SR 

EXEMPT 
RR 
SR 

SRR 
RR 
SR 

SRR 
SR 

EXEMPT 
RR 
SR 

EXEMPT 
RR 
SR 

SR 

RR 
SR 

SRR 
RR 

SRR 

SR 

SR 

SR 

SRR 

RR 

RR 

SR 

RR 

SR 

SR 

RR 

SRR 

RR 
SR 

RR 

2? 

RR 

RR 

SRR 
RR 

RR 
PR 

SRR 

RR 

RR 

SR 

SRR 

RR 

RR 

SR 

SR 

EXEMPT 

RR 

SRR 

SR 

RR 

ZR 

SR 

RR 

SR 

SRR 

SR 

RR 

ZR 

SR 

SR 

RR 
SR 

SRR 
RR 

EXEMPT 

SR 

SR 

SR 

SRR 

SRR 

SR 

SR 

SR 

SR 

ZR 

ZR 

EXEMPT 
SR 

EXEMPT 
SR 

SRR 

SRR 

SR 

SR 

ZR 

SRR 

SRR 

SR 

SR 

ZR 
SR 

SR 

RR 

RR 

RR 

RR 

RR 

RR 

RR 

RR 

RR 

RR 

10 
Agricultural 
inputs 
11 
Hotel 
accommodation 
12 
Admission to 
sporting  events 
13 
Use of sporting 
facilities 
14 
Social services 
15 
Cremation 
services 
16 
Medical and 
dental  care 
17 
Collection of 
domestic waste 
and  street 
cleaning 
SR:  standard  rate 
RR:  reduced rate 
SRR: super-reduced rate 
PR:  parking rate 
ZR:  zero rate 

RR 
SR 

RR 
SR 

RR 

SR 

SR 

RR 

SR 

SR 

RR 

RR 
SR 

RR 
SR 

EXEMPT 

ZR 

RR 

EXEMPT 
SR 

SR 

SR 

RR 

SR 

RR 

RR 

RR 

RR 

SR 

RR 

RR 

RR 

SR 

EXEMPT 

RR 

RR 

??. 

SUMMARY  LIST OF SUPER REDUCED RATES OF VAT APPLICABLE IN MEMBER STATES 
(note: this list is not exhaustive) 

TABLE N°3 

BE 

DA 

DE 

GR 

0 
0 

0 

4 
4 
4 

4 

Goods  and services 
(short  description) 

Foodstuffs 

Beverages: 
-Mineral  water/lemonade 
Children's  clothing and 
footwear 
Pharmaceutical  products 

Books 
Newspapers 
Periodicals 
TV  licence 

Hotels 
Restaurants 
Admissions  to cinema, 
theatre,  cultural  events. 
Admissions  to  sporting 
events. 
Cut  flowers  and  plants. 
Treatment  of  waste  and 
waste  water. 
Collection  of domestic  waste. 
Transport  of persons 

IE 

0 

0 
0 

0 

FR 

2,1 

2,1 
2,1 
2,1 

2,1 

IT 

4 

4 
4 
4 
4 

4 
4 

ES 

3 

3 

3 

24 

LUX 

PB 

PO 

GB 

3 

3 

3 
3 

3 
3 
3 

3 
3 

3 

3 
3 

3 
3 
3 

0 

0 
0 

0 
0 
0 

0 
0 
0 

Building  sector: 
-Supply  of new  buildings 
- Renovation 

works 

and 

repairs 

-Construction  works  of  new 

buildings 

Works  of art,  antiques 

Medical  equipment 

Water  supplies  etc. 

Agricultural  inputs 

Social  services/charities  etc. 

3 

3 

3 

4 

4 

4 

4 

4 

0 

0 

3 

3 

3 

3 

3 

3 

0* 

0* 

0* 

0 
(if imported) 

0 

0 

0 

UK: The zero rate applies to supplies of domestic buildings and approved repairs to listed buildings 

25 

Proposal  for a 
COUNCIL DIRECTIVE 
amending Directive  77/388/EEC 
on the common  system of Value Added Tax 
(taxation  of agricultural  outputs) 

26 

EXPLANATORY  MEMORANDUM 

The  purpose  of  this  proposal  is  to  enable  the  Council  to  take  a  decision  on  the  taxation  of 
agricultural  outputs  after  1  January  1995  as  it  is  required  to  do  under  Community  VAT 
legislation.  The decision  is necessary  to consolidate fiscal  equality  in the Internal  Market by 
eliminating  distortions  of  competition  which  have  arisen  as a result  of  structural  imbalances 
in  the  level  of  VAT  rates  currently  applied  by  Member  States  to  supplies  of  agricultural 
outputs.  It  is therefore  in  the  interest  of  Member  States  that  the  source  of  fiscal  distortion 
arising  in  current  VAT  legislation  should  be  eliminated. 

At  present  Community  VAT  legislation(1) lays  down  a  series  of  rules  which  Member  States 
must respect in setting the structure, levels and coverage of rates of value added tax that they 
apply.  These  rules  on  the  approximation  of  VAT  rates  were  necessary  to  enable  the 
Community  to  abolish  internal  border  controls  on  1 January  1993  as part  of  the  programme 
of  eliminating  fiscal  frontiers.  However,  with  regard  to  agricultural  outputs  other  than 
foodstuffs  the  Council  considered  it  appropriate  to  defer  a  decision  on the  appropriate  VAT 
rate treatment until  31 December  1994 (Article  12(3)(d) of the Sixth Directive).  The Council 
also  decided  that  in  the  meantime  a  standstill  arrangement  would  apply  under  which  those 
Member  States which  were  already  applying  a reduced  VAT  rate to  supplies  of  agricultural 
outputs  at the time the Directive was  adopted  would  be  permitted  to  continue to  apply  them 
for  a  further  two  years;  those  Member  States  which  applied  the  standard  rate  at that  time 
would  continue  to  apply  this rate. 

The  expression  "agricultural  outputs  other  than  foodstuffs"  covers products  such  as  flowers, 
plants  and  similar  products  of  the  floriculture  and  horticulture  sectors  as well  as items  such 
as, raw wool  and wood of various kinds.  The current  situation  in Member  States with  regard 
to the  taxation  of  these  products  at  reduced  rates  is  set  out  in  the  following  table: 

agricultural  outputs 

Member  States  applying  a  reduced  rate 

flowers,  plants  etc. 

DE,  IT,  LU,  NL,  PO 

wool 

BE,  LU,  NL 

wood  for  industrial  uses 

DE 

wood  for  use  as firewood 

BE,  DE,  EL,  IE,  IT,  LU,  NL 

As can be  seen,  the  products  in  question,  with  the possible  exception  of  firewood,  are taxed 
at  reduced  VAT  rates by  a minority  of Member  States only.  In  order  to enable  the  Council 
to take the necessary  decision on the taxation  of agricultural  outputs after  December  1994 the 
Commission  has  examined  the  situation  to  see  whether  the  current  structural  imbalance  in 
VAT rates applied by different  Member  States in the sector has had any discernible effect  on 
cross-border purchasing patterns since the abolition of frontier  controls in January  1993.  Such 
evidence as is available has revealed that this has not in fact  been the case and that there has 
not  been  any  significant  changes  in  cross-border  purchases  by  private  individuals  since 

(i) 

The  Sixth  Council  VAT Directive  77/388/EEC  as amended  by Directive  92/77'/EEC. 

27 

January  1993.  This is not  surprising  given that the type  of products under  consideration  are 
by  their  nature  not  ones which  private  persons would  normally  travel  long  distances  to buy 
even  if there were  significant  price  differences  from  one Member  State to  another. 

However, the Commission  is aware of reported  cases of fraud  in regard to flowers  and plants 
in which traders  situated  in Member  States in which these products are taxed  at the  standard 
rate,  have  apparently  purchased  such  products  in  Member  States in  which  they  are taxed  at 
the reduced rate and have not subsequently  declared these purchases to their fiscal  authorities. 
These cases of fraud  are essentially  a matter for  investigation by the competent  authorities of 
the Member  States concerned.  However,  it is clear that the problem  has arisen  as a result  of 
unscrupulous  traders  deciding  to  take  advantage  of  the  difference  in  VAT  rates  between 
Member  States.  The differences  have arisen because  of the fact  that  some Member  States at 
present  have  the  option  of  retaining  a  reduced  rate.  As  the  text  of  Article  12(3)(d)  of  the 
Sixth Directive  stands at present,  no remedy  is provided  in  Community  law to overcome the 
present  structural  imbalances  in  VAT  rates  applied  in  the  floricultural  and  horticultural 
sectors.  This is because Member  States currently  applying the  standard  rate  do not have the 
option  of  applying  the  reduced  rate. 

There are, therefore, two solutions to this problem which the Commission might propose.  On 
the  one  hand,  the  Commission  can  propose  that  the  standard  VAT  rate  should  apply  to  all 
supplies  of  flowers  and  plants  from  1 January  next.  This would  have the  effect  of  creating 
a  level  playing  field  in this  sector  free  from  fiscally  induced  distortions  of  competition  as a 
result  of  differences  in  VAT  rates. 

Alternatively,  the  Commission  might  propose  that Member  States  should  have the  option  of 
applying  a reduced  rate to  such  supplies.  Such  an option  might  be  advisable  in view  of  the 
negative  effects  that  an  increase  in  the  VAT  rate  would  have  on  production  and  sales  of 
flowers  and  plants  in  Member  States  currently  applying  a reduced  rate.  Flowers  and  plants 
are  products  which  by  their  nature  and  the  nature  of  the  market  are  vulnerable  to  abrupt 
increases in the retail  price level.  Member  States could avoid this outcome by availing of the 
option  to  apply  a reduced  VAT  rate  to  supplies  of  these  products. 

In  view  of  the  foregoing  the  Commission  is  of  the  opinion  that  on  balance,  the  most 
appropriate means of overcoming the current  structural  imbalance in rates would be to extend 
the  option  of  applying  a  reduced  rate to  flowers,  plants  and  the  like  as well  as to  firewood 
but  on  a transitional  basis  only.  The  Commission  does  not  wish  to  extend  the  scope  of  the 
reduced rate on a permanent basis at present.  Changes of this type can be more  appropriately 
considered  against  the  background  of  future  Council  conclusions  on  the  shape  of  the  1997 
definitive  VAT  regime.  In  addition  the Commission  does not  favour  extending the  scope of 
the reduced  rate to other agricultural  outputs such as wool  and wood for  industrial  use on the 
grounds that such products are by their nature inputs into manufacturing  processes which  for 
the  most  part  are  carried  out  by  taxable  persons with  a  right  to  deduct  input  VAT. 

28 

Commentary  on the  Articles 

Article  1 

It  is  proposed  to  end  the  present  standstill  arrangement  with  regard  to  the  taxation  of 
agricultural  outputs  other  than  products  falling  within  category  1 of  Annex  H,  by  deleting 
Article  12(3)(d)  of  the  Sixth  VAT  Directive  and  inserting  a  new  subparagraph  (g)  in 
Article  28(2)  which  will  permit  Member  States  to  apply  a  reduced  rate  to  supplies  of  live 
trees and other plants (including bulbs, roots and the like, cut flowers  and ornamental  foliage) 
and  wood  for  use  as  firewood  for  the  duration  on  the  transitional  period  referred  to  in 
Article  28(1). 

29 

Proposal  for  a 
COUNCIL  DIRECTIVE 
amending  Directive  77/388/EEC 
on the  common  system  of  Value  Added  Tax 
(taxation  of  agricultural  outputs) 

THE  COUNCIL  OF  THE  EUROPEAN  UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article  99  thereof, 

Having  regard  to the  proposal  from  the  Commission, 

Having  regard  to the  opinion  of  the  European  Parliament, 

Having  regard  to the  opinion  of  the Economic  and  Social  Committee, 

Whereas Article  12(3)(d) of Directive 77/388/EEC(1), as last amended by Directive 94/5/EC(2), 
lays down that the rules concerning the taxation of agricultural  outputs other than those falling 
within  category  1  of  Annex  H  are  to  be  decided  unanimously  by  the  Council  before 
31  December  1994  on  the  basis  of  a  Commission  proposal;  whereas  until  that  date,  those 
Member  States which had already been applying a reduced rate might continue to do so while 
those  applying  a  standard  rate  could  not  apply  a reduced  rate;  whereas that  allowed  a two-
year  postponement  in  the  application  of  the  standard  rate; 

Whereas  experience  has  shown  that  the  structural  imbalance  in the VAT  rates  applicable by 
Member  States to  agricultural  outputs  of the floricultural  and  horticultural  sectors  has led  to 
reported  cases of fraudulent  activities;  whereas that  structural  imbalance  is a direct  result  of 
the  application  of  Article  12(3)(d)  and  should  be  redressed  accordingly; 

Whereas  the  most  appropriate  solution  would  be  to  extend  to  all  Member  States,  on  a 
transitional  basis, the option  of applying  a reduced  rate to  supplies  of agricultural  outputs of 
the  floricultural  and  horticultural  sectors  and  of  wood  used  as  firewood, 

HAS  ADOPTED  THIS  DIRECTIVE: 

Article 1 

Directive  77/388/EEC  is hereby  amended  as  follows: 

1. 

Article  12(3)(d)  is  deleted. 

a) 
(2) 

OJ  N oL  145,  13.6.1977,  p. 1 
O J N oL  60,  3.3.1994,  p.  16. 

30 

2. 

The  following  indent  is inserted  in  Article  28(2): 

(g)  Member  States  may  apply  a reduced  rate to  supplies  of  live trees  and  other 

plants (including bulbs, roots and the like, cut flowers  and ornamental  foliage) 
and  wood  for  use  as  firewood. 

The  present  indent  (g) becomes  indent  (h). 

Article 2 

1. 

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions  necessary  to  comply  with  this  Directive  by  1 January  1995  at  the  latest. 
They  shall  forthwith  inform  the  Commission  thereof. 

When  Member  States  adopt  these  provisions,  these  shall  contain  a  reference  to  this 
Directive  or  shall  be  accompanied  by  such  reference  at  the  time  of  their  official 
publication.  The  procedure  for  such  reference  shall  be  adopted  by  Member  States. 

2. 

Member  States  shall  communicate  to  the  Commission  the  text  of  the  provisions  of 
domestic  law  which  they  adopt  in the  field  covered  by  this  Directive. 

Article  3 

This Directive  shall enter into force  on the day of its publication in the Official  Journal  of the 
European  Communities. 

This  Directive  is  addressed  to the  Member  States. 

Article  4 

Done  at Brussels, 

For  the  Council 
The  President 

31 

Financial  statement 

The  proposed  Directive,  when  adopted,  will  have  no  consequences  for  the  collection  of 
Community  own resources. 

32 

Impact  on  SMEs 

Proposal  for  a Council  Directive  amending Directive  77/388/EEC  on the common  system  of 
value  added  tax. 

1. 

2. 

3. 

Note 

taxation  of  agricultural  outputs. 

Administrative constraints for business resulting from the application of the legislation. 
None 

Easing  of burdens  on  business. 
None 

Disadvantages  for  business. 
None 

re points  1, 2 and  3. The proposal  has been tabled  in  order to enable the Council  of 
Ministers  to  fulfil  its  legal  obligation  to  take  a  decision  on  the  appropriate  rate  of 
VAT to apply to agricultural  outputs from  1 January  1995. The decision  in question 
will  simply  determine  the  level  of  its  VAT  rate  to  be  applied  to  supplies  of  such 
products  from  that  date.  It will  have  no  other  impact  on business. 

4. 

Effects  on  employment. 
Positive. 

However,  according to a study  commissioned  by the Dutch flower  and plant industry(1), 
a return  to the  standard  VAT  rate would  have a negative  impact  on employment  in the 
Netherlands and Germany  (estimated to be around  10% of the workforce  in this sector). 

5.  Have  the  social  partners  been  consulted? 

No 

6. 

Are  there  any  less  constraining  alternatives? 
No 

(i) 

VAT  rates  for  ornamental  plants  in  the  EU  as  from  January  1,  1995  (Moret,  Ernst 
&  Young). 

33 

ISSN 0254-1475 

COM(94) 584 final 

DOCUMENTS 

EN 

03 09 

Catalogue number : CB-CO-94-694-EN-C 

ISBN 92-77-84287-3 

Office for Official Publications of the European Communities 
1^2985 Luxembourg 

34